Over the past several years, corporations have implemented various strategies aimed at supporting employees from diverse backgrounds. One such strategy is the use of internal "affinity groups." Affinity groups are typically formed based upon a common aspect of social identity, such as a protected characteristic like sexual orientation, gender, race, or national origin. Most employers and employees believe that their workplace benefits from increased diversity awareness. However, a recent case from the United States District Court for the Northern District of Illinois demonstrates that affinity groups must be properly structured so that they do not provide legal fodder for employees who challenge a corporation's employment actions.

In Sinio v. McDonald's, the plaintiff was an Asian American accountant for McDonald's Corporation. Sinio's immediate supervisor was Caucasian, while her second and third level managers were African American. Throughout Sinio's employment, McDonald's received complaints from its customers about her performance. Sinio advised her supervisors that her difficulties resulted from an uneven workload distribution, and requested that the workload be redistributed amongst the other two employees. According to Sinio, her supervisors refused to redistribute the workload, and she complained that this decision was discriminatory since the workload of the other two employees in her group — one of whom was African American and one of whom was Middle Eastern — was not as heavy. After placing Sinio on two successive performance plans, McDonald's terminated Sinio's employment. Sinio subsequently filed a lawsuit against McDonald's wherein she alleged, among other things, race discrimination and retaliation.

McDonald's moved for summary judgment on the race discrimination and retaliation claims, and the district court denied McDonald's motion on both claims. In its recitation of the facts, the district court noted, among other factors, that "all of the African American employees who worked in accounting...were members of an African American networking organization designed to help African American employees achieve promotions." In addition, in its analysis of the circumstantial evidence of discrimination, the court noted that a "large part of Sinio's theory in this case appears to be that African American supervisors..., all of whom were members of a networking program for African American employees, favored African Americans and discriminated against Sinio." After weighing all of the evidence presented by Sinio, including evidence pertaining to the timing of the scrutiny and criticism of Sinio's performance, the company's response to her complaints, and the redistribution of her workload after Sinio was replaced, the court held that Sinio had presented enough evidence to defeat summary judgment on her discrimination and retaliation claims. Although noting that there was "little doubt" that McDonald's could offer a legitimate reason for terminating her, the court stated that Sinio had met her burden of creating a genuine issue of material fact as to whether the reason was pretextual, and was entitled to bring her case before a jury. While it is unclear exactly how the supervisors' membership in the affinity groups factored in the court's decision, it is clear that the plaintiff raised the issue in an effort to support her claims.

Affinity groups can be a viable mechanism for employers to address the challenges of diversity in the workplace. But the key is to structure affinity groups in a way that achieves the group's goals without infringing on all employees' rights to a workplace that is fair and non-discriminatory. To this end, employers should consider implementing the following best practices as part of any affinity group recognition policy:

• Ensure that membership in each group is open to all employees who support a group's goals, even if the individual does not share the common characteristic that is the basis of the group;
• Membership in the group should be voluntary — employers should not pressure employees into joining a particular affinity group;
• Employers should not allow affinity groups to make any employment related decisions, including promotions, terminations, or hiring;
• Employers should ensure that there are established guidelines for and oversight of the groups, which are applied equally to all groups.

In short, affinity groups serve several important functions for corporations, including making diverse constituencies feel more welcomed and valued, and removing barriers to productivity within the workplace. Employers should continue to support and embrace diversity in the workplace, but do so in a way that fosters trust and personal responsibility in achieving the company's goals. If you have any questions about the use of affinity groups in the workplace, please contact a member of Schiff Hardin's Labor and Employment Group.

So-called "no-hire" or "non-raiding" clauses, used by companies to prohibit a vendor or former employee from soliciting its current employees, have become increasingly common in California's mobile workforce. In some instances, these contracts go beyond a "no-solicitation" bar, and include an outright ban on hiring. Until recently, there has been little case law addressing the enforceability of such "no-hire" clauses. With the release of VL Systems, Inc. v. Unisen, Inc. this past month, California companies are now on notice that broad "no-hire" clauses may run afoul of state law.

VL Systems addressed an agreement between Star Trac Strength ("Star Trac") and its vendor, VLSystems, Inc. ("VLS") which furnished computer services on a limited project for Star Trac. The contract included a provision whereby Star Trac agreed not to hire, or attempt to hire, VLS' personnel for one year after the termination of the project. The agreement included a liquidated damages provision, requiring Star Trac to pay VLS an amount equal to 60% of the annual salary for any employee it hired in violation of the 'no-hire' clause. After the project was completed, in April 2004, David Rohnow went to work for VLS. In September 2004, while employed at VLS, Rohnow responded to an Internet classified ad, and was hired by Star Trac. VLS demanded payment of liquidated damages in the amount of $60,000 for breach of the 'no-hire' provision in its contract with Star Trac. When Star Trac declined to pay, VLS filed suit.

The California Court of Appeals held that the broad 'no-hire' clause contained in the parties' contract violated California Business & Professions Code Section 16600, and was unenforceable. That statute provides that, subject to certain exceptions, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." In addressing the scope of the 'no-hire' clause here, the court expressed concern that it impacted a broad range of third parties, including VLS employees who had not even worked on the Star Trac project, but who nevertheless were barred from going to work for Star Trac.

Citing an earlier decision, Loral Corp. v. Moyes, the court noted that narrower restrictions might pass muster under Section 16600, in that "reasonably limited restrictions which tend more to promote than restrain trade and business do not violate the statute." In this regard, the court acknowledged that a narrower restraint, for example, one which merely prevents "solicitation of employees who actually performed work for the client," might be enforceable. In short, the court took some care in limiting its holding, so as to avoid any suggestion it was calling into question prior cases upholding "non-solicitation" clauses under Section 16600.

In the wake of VL Systems, California employers should carefully assess any "no-hire" provisions in contracts with vendors, current or former employees, or others. Please feel free to contact any member of Schiff Hardin's Labor and Employment Group for additional information or assistance. Our San Francisco office is carefully monitoring this and related developments impacting employee mobility issues in California.

The California Labor Code requires employers to furnish non-exempt employees meal periods and rest periods. Those employers who fail to do so must pay a "premium" consisting of one hour's pay to each affected employee for each day during which a violation occurs. The availability of these payments (mandated by changes in the law which took effect in 2000) has spawned a multitude of lawsuits in California by employees seeking recovery of the "premiums" on a class-wide or individual basis. However, until the California Supreme Court's recent decision in Murphy v. Kenneth Cole Productions, employers could not be certain whether their potential liability for premium payments stretched back a single year (under the theory that the payments are "penalties," subject to a one-year statute of limitations), or three years (under the view that the payments are "wages," subject to a longer limitations period).

In Murphy, the California Supreme Court determined that the premium payments mandated by the Labor Code are in the nature of wage payments, and that claims seeking recovery of these premiums are thus subject to a three-year statute of limitations. The immediate impact of Murphy will be to significantly increase the stakes in meal and rest period litigation, which already occupies a favored position among plaintiff's employment lawyers in the state. The decision thus reinforces the need for employers to carefully assess their policies and practices relative to meal and rest periods, and to take proactive steps to ensure the exacting requirements of California law are fully met. In order to avoid costly penalties, employees should be compelled to take required meal periods within the prescribed time limits, and should be paid the required premiums when they do not.

The members of Schiff Hardin's Labor and Employment Group who are licensed in California are experienced in the full range of wage and hour and other issues confronting California employers and are available to answer any questions you might have regarding California requirements.

The New York Court of Appeals, New York's highest court, has handed employers in the securities industry in New York a substantial victory. The decision in Rosenberg v. MetLife, Inc. resolved a split among New York courts as to whether statements made by an employer on the Uniform Termination Notice for Securities Industry Registration ("Form U-5") enjoy a qualified privilege or an absolute privilege under state law. The MetLife court held that statements made by an employer on Form U-5 are absolutely privileged and cannot give rise to a claim for defamation. The decision in MetLife grants member firms the freedom to candidly discuss the circumstances surrounding an employee's termination in the Form U-5.

Significance of Form U-5

Form U-5 plays a significant role in the National Association of Securities Dealers' ("NASD") regulation of registered representatives in the securities industry. Pursuant to NASD bylaws, within 30 days after termination for any reason of a registered employee's employment, a member firm must complete and submit Form U-5 to the NASD. In addition, the employer is required to give a copy of Form U-5 to the terminated employee. As part of its obligation to complete Form U-5, the employer is required to disclose the reasons for termination of the terminated employee. Failure to do so raises substantial compliance issues and may subject the employer to financial and other penalties. The NASD stores the Form U-5 on its Central Registration Depository ("CRD"), an on-line data registration and licensing database used by regulators throughout the securities industry, to register, license and regulate securities firms and their brokers. Through one component of the CRD, the NASD allows investors to obtain certain information about individual brokers and registered securities firms. Upon request, the NASD will release information pertaining to criminal actions, civil actions, customer complaints and securities related terminations for cause via mail or e-mail. It allows prospective employers and public investors to research the employment history of an individual whom they may hire or on whose advice they rely. In addition, Form U-5 is often the first "red flag" that the NASD may receive regarding possible misconduct by a member of the securities industry and may lead to disciplinary action by the NASD.

The Decision

In MetLife, plaintiff Chasky Rosenberg was terminated by MetLife, Inc. Rosenberg then brought an action in the United States District Court for the Southern District of New York ("Southern District") asserting numerous claims, including claims for employment discrimination, libel, fraudulent misrepresentation and breach of contract. He alleged that MetLife libeled him in statements made by MetLife on Form U-5 which was filed in connection with his termination. The Form U-5 stated:

"An internal review disclosed Mr. Rosenberg appeared to have violated company policies and procedures involving speculative insurance sales and possible accessory to money laundering violations."

The Southern District held that under New York law, MetLife's statements on Form U-5 were absolutely privileged and granted MetLife's motion to dismiss the fraudulent misrepresentation and libel claims.

On appeal to the United States Circuit Court of Appeals for the Second Circuit ("Second Circuit"), Rosenberg argued that employers should not be given complete immunity for statements made on Form U-5. Rather, they should be afforded only a qualified, not absolute, privilege. Noting that this was a question of New York law that had never been resolved, the Second Circuit certified the question to the New York Court of Appeals ("Court of Appeals") for a definitive ruling under New York state law.

The Court of Appeals accepted the certification, heard oral argument and ruled in MetLife's favor. The Court of Appeals considered the weighty competing interests on each side of the issue. It recognized that a registered representative had a legitimate concern that his reputation and future employment opportunities could be damaged by false statements made by a vindictive employer. However, that interest had to be balanced against the industry's and the investing public's need to have full and candid disclosure of wrongdoing by brokers.

The Court of Appeals concluded that the public's interests were paramount to the brokers' private interest in their reputation:

"The public interests implicated by the filing of Forms U-5 are significant. The form is designed to alert the NASD to potential misconduct and, in turn, enable the NASD to investigate, sanction and deter misconduct by its registered representatives. The NASD's actions ultimately inure to the benefit of the general investing public, which faces the potential for substantial harm if exposed to unethical brokers. Accurate and forthright responses on the Form U-5 are critical to achieving these objectives."

In support of its decision, the Court of Appeals noted that the NASD is a quasi-governmental entity. It regulates more than 5,000 brokerage firms and more than 660,000 registered securities representatives. Further, the NASD has been delegated authority to enforce the requirements of the Securities and Exchange Act of 1934 and is the primary regulator of the broker-dealer industry. Moreover, the court relied on the fact that one of the NASD's "central" responsibilities involves the investigation and adjudication of suspected violations of the SEC's laws and regulations as well as the NASD's own rules. The Form U-5, the court opined, plays a central role in the NASD's self-regulatory process because:

• Filing is mandatory within 30 days of termination of the registered representative and firms are subject to penalties should they fail to comply;
• Upon receipt of Form U-5, the NASD routinely investigates terminations for cause to determine whether the representative violated any securities rules;
• Form U-5 is often the first step in the NASD's quasi-judicial process;
• Form U-5 is an aid to prospective member employers to screen potential employees.

Based upon Form U-5's compulsory nature and the central role it plays in the NASD's quasi-judicial process, the Court of Appeals concluded that statements made by an employer on Form U-5 should be accorded an absolute privilege.

Conclusion and Caveats

The MetLife decision is a substantial victory for employers in the securities industry. Employers in New York no longer have to engage in hand wringing every time they fill out Form U-5, fearful that a candid response might subject them to liability. However, the victory should be tempered by several caveats:

• Member firms are not totally insulated from legal action relating to defamatory statements allegedly made on Form U-5. Registered employees who are in fact defamed may, under NASD rules, commence an arbitration or court action to expunge any alleged defamatory language included in Form U-5;
• Member firms could be subject to regulatory action if they have abused Form U-5's absolute privilege and used it for improper purposes;
• Member firms in jurisdictions outside New York may not take comfort in the MetLife decision because it has precedential value only in New York. Other jurisdictions may have already adopted the qualified privilege standard or some other standard when considering defamation claims in the Form U-5 context. Employers in the securities industry need to check state law in the jurisdiction where the Form U-5 defamation claim has been asserted;
• Finally, employers in the securities industry and employers generally will need to be vigilant and insure that they confine their stated reasons for termination to Form U-5. Statements made in Form U-5 when communicated to third parties or made in voluntary context will not carry the mantle of protection provided by the MetLife decision.

Patricia Costello Slovak, "Rainmaking, Negotiating and Collaborative Development," LexisNexis® Women in the Legal Profession Summit, Philadelphia, Penn. (September 25, 2007) [Link]